The House of Representatives has passed a bill aimed at curbing China's ongoing currency manipulation. Some critics argue that this legislation to address China's continued undervaluation would be "protectionist," but this makes no sense. If someone cheats in a game, you call them on it. You demand that they play by the same rules.
With that said, let's look at five key reasons why penalizing China for its cheating makes sense:
1. What would Ronald Reagan do? He would have said to the Chinese: appreciate the Yuan, stop the subsidies, or lose access to our market. Period. The current bill, H.R.2378, is mild compared to what President Reagan would have done. And it's because the Chinese are distorting the free market, not honoring it. It's always taken American leadership to right this wrong. Really the only times we've seen stability in manufacturing employment AND a balanced current account were immediately after the U.S. compelled revaluations (Nixon in 1971, Reagan in 1985-1987).
2. Trade War?A trade war never materialized after Buy America provisions in the stimulus. It never materialized after Obama's tariffs on Chinese tires. And it won't materialize now. That's because we have the leverage--not the Chinese. We can find replacements for China's debt financing, but they cannot find a replacement for the American consumer market.
3. Will the Chinese drop their American debt? Not likely. If they do, we can simply reschedule it. Period. Frankly, we don't WANT the Chinese to finance our debt, because it's like a big Ponzi scheme. We outsource production, then borrow from the Chinese to buy made in China products. They accumulate a trade surplus. We lose jobs and accumulate trade debt. Compelling a revaluation of the Yuan is the first step in stopping that bad habit. And, there are plenty of other buyers for U.S. debt.
4. Irresponsible Congress? Not in the least. This action will strengthen the Administration's hand in dealing with the Chinese. And, if the bill becomes law, it provides American industry with a "trade-legal" way to seek relief from competition that is subsidized by currency manipulation.
5. Will this be effective? Absolutely. It will put downward pressure on our overall trade deficit, because we compete in a lot of third markets with the Chinese. And, it will reduce harmful imbalances. Exchange rates are not the silver bullet, but getting them right is a prerequisite for progress on other issues.